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Bankers are divided over the seriousness of a provision in the Dodd-Frank Act that would repeal Regulation Q and allow banks to pay rates for demand deposits.
March 17 -
An eleventh-hour amendment to Dodd-Frank that repealed Reg Q could punish community banks that serve as the lifeblood for small businesses across the country.
March 16
To The Editor:
Thank you for the excellent article in the March 18 American Banker, "
Community bankers who have studied the repeal can only conclude it would have damaging effects on their cost of funds and the cost of credit to their business customers.
Frank Sorrentino, CEO of North Jersey Bank, correctly notes that many bankers have yet to study the true impact of this repeal because rates are at historical lows. History teaches us that the Fed funds rate rose almost 400 basis points following our last recession. Imagine the impact on the cost of credit and our ability to make fixed-rate loans or purchase fixed-rate securities with such volatile interest-bearing liabilities. Regulatory agencies have already recognized and criticized this practice as unsafe and unsound. Remember the savings and loan crisis in the 1980s?
The article is void of perhaps the most compelling reason why this is a bad idea. Congress recognized that community banks already operate at a competitive disadvantage in a too-big-to-fail megabank world, and provided the FDIC the flexibility to extend the Transaction Account Guaranty program allowing 100% deposit insurance on non-interest-bearing transaction accounts. The TAG program was recently extended through Dec. 31, 2012. Once the repeal of Regulation Q takes effect in July of this year and corporate accounts are converted to interest-bearing accounts, TAG insurance goes away. Does anyone seriously think that too-big-to-fail institutions will not exploit their competitive advantage and inflate rates to attract these deposits away from community banks? How many of our customers will question the safety of their deposits over $250,000?
Such accounts will also be subject to reserve requirements of 10%, robbing important capital that we can make available for loans at a time when our economy struggles to find its footing once again.
We will continue to urge Congress to delay the implementation date of this repeal in order for the Federal Reserve to study its impact on safety and soundness, and more importantly, allow time to do what we believe they should have done in the first place: amend Regulation D to lift the restrictions on the number of monthly transactions so our corporate customers can sweep deposits into interest-bearing money market accounts.
J. David Williams is chairman of HCSB, a $360 million community bank in Plainview,Texas, with offices in the Texas Panhandle and the Texas Hill Country. He is also chairman of the Independent Bankers Association of Texas.
